The rally in Viacom, Inc. (NASDAQ:VIA,NASDAQ:VIAB) continues. VIA stock is up after a solid Q4 earnings report on Thursday morning. VIA Class B shares are up 10%, and the Class A shares have gained 7%.

Indeed, Viacom’s Class B shares now have bounced more than 50% after hitting an eight-year low in November. And there has been some good news here, even beyond Thursday morning’s release. Viacom reportedly is considering merging (again) with CBS Corporation (NYSE:CBS).

Media stocks as a group generally have rallied, as the deal between Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOX,NASDAQ:FOXA) highlighted the potential value of media assets like those owned by Viacom.
At the same time, however, there were plenty of reasons why VIA stock hit that eight-year low just a few months back. Viacom’s Q4 earnings might have come in ahead of expectations – but they still declined year-over-year.

Cord-cutting defections aren’t slowing, as witnessed by subscriber growth at Netflix, Inc. (NASDAQ:NFLX). Viacom stock might look cheap – but shares of declining businesses usually are.

At this point, it’s simply tough to make a specific bull case for VIA stock. The CBS deal, if it goes through, simply gives Viacom shareholders some ownership of a larger entity with similar problems.

Other media asset owners look more likely to get cash-based buyout offers. And, overall, the risks facing the sector are real. Viacom has had a nice bounce, but it’s captured most, if not all, of its potential upside.

Q4 Earnings

Viacom’s adjusted EPS of $1.03 beat Street expectations by $0.09. Revenue of $3.07 billion declined 7.5% – two points-plus more than expected.

But investors appear to be focusing on the company’s guidance for affiliate fee revenue, the payments received from cable and satellite operators like Comcast Corporation (NASDAQ:CMCSA) and DISH Network Corp (NASDAQ:DISH).

Viacom raised its guidance for 2018 to a low-single-digit to mid-single-digit decline, better than the mid-single-digit drop expected coming into the quarter. Cost-cutting efforts are working as well, given the EPS beat.

But stepping back from expectations, the quarter hardly seems like good news. Affiliate revenues declined in Q4 and still are expected to decline in Q1. That’s a worse performance than other cable station owners.

Disney’s ESPN and rivals like AMC Networks (NASDAQ:AMCX) are seeing subscribers decline, but revenue still increase. The assumption is that Viacom’s flagship networks MTV and Comedy Central don’t have the negotiating power to get the same per-subscriber bumps seen elsewhere.

Cost-cutting might have helped earnings, but they still declined. Adjusted EPS fell 1%; adjusted operating income dropped 4%. In the Media Networks segment, operating income fell 7%. The drop was bigger in the movie business, though due largely to a comparison to last year’s release of Star Trek Beyond.

There’s just not much here to suggest anything other than a declining business. Nor does the company’s detailed commentary suggest much optimism. Viacom highlighted MTV’s Floribama Shore; a SpongeBob SquarePants musical; a Top Gun reboot; and 22-year old South Park, among other properties.

Qualitatively, it just doesn’t seem like an attractive asset base.

VIA Stock in a Takeout

Fundamentally, there are concerns as well. Sales and earnings are declining. Cost-cutting might help, but it also limits Viacom’s attractiveness in a takeout scenario. Whether a buyer turns out to be CBS or someone else, ‘synergies’ likely will be a big part of the deal.

But as several analysts have pointed out, there’s increasingly little fat left for an acquirer to cut, which means less incremental profit going to an acquirer.

Meanwhile, a CBS deal isn’t guaranteed, either. As James Brumley pointed out last month, CBS and Viacom have rekindled merger talks in the past, after joining in 2000 and splitting again in 2006. Any Viacom-CBS deal likely will be a simple stock swap.

As such, the premium CBS is going to pay for VIA stock (if any) is not going to rise that much just because of a single quarter.

I do understand the argument that content assets are undervalued; indeed, I own shares of AMCX. But VIA stock seems like a poor play on that argument. Its content doesn’t seem that attractive.

A CBS deal won’t involve much, if any cash, whereas AMC likely would sell itself for mostly or all cash. And both AMCX and Discovery Communications Inc. (NASDAQ:DISCA) are outperforming VIA stock (and have for some time), Q4’s beat aside.

There’s still an interesting play in the odd spread between Viacom’s Class A and Class B shares. VIA still trades at a 21% premium to VIAB, despite the fact that both share classes would be treated equally in a buyout. That spread cleared 40% back in August and still seems too wide.

Liquidity issues make arbitrage tough, but investors bullish on Viacom stock should focus solely on the cheaper Class B shares, as the voting power difference is zero in practice. (Sumner Redstone’s National Amusements controls both classes, along with CBS.)

Regardless of the spread, however, VIA stock seems to have run its course. A single-digit forward multiple sounds cheap – but it’s not necessarily so for an indebted company whose earnings are declining.

And there are better plays in the media space. Viacom stock almost certainly was too cheap in November, but that doesn’t seem to be the case anymore.

As of this writing, Vince Martin is long shares of AMC Networks. He has no positions in any other securities mentioned.